Greenspan Watch

Markets were about as unsettled (very) as sentiment is optimistic. For the
week, the Dow dipped less than 1%, while the S&P500 declined about 1%.
The Transports lost 2%, reducing y-t-d gains to 19%. The Utilities also declined
2%, and the Morgan Stanley Consumer index fell 1.5%. The Morgan Stanley Cyclical
index was about unchanged (up 10% y-t-d). The small cap Russell 2000 and S&P400
Mid-Cap indices dipped 1%. The tech sector generally outperformed. The NASDAQ100
declined 0.4%, and the Morgan Stanley High Tech index was unchanged. The Semiconductors
gained 2%, and the NASDAQ Telecommunications index was slightly positive. The
Street.com Internet Index was slightly negative, but still sporting a 28% 2004
gain. The Biotechs were hit for a 4% loss. The financial stocks were unimpressive,
with the Broker/Dealers down 2% and the Bank down 3%. With bullion surging
$9.20, the HUI gold index was about unchanged.

Freddie Mac posted 30-year fixed mortgage rates dipped two basis points this
week to 5.74%. Fifteen-year fixed mortgage rates were one basis point lower
to 5.15%. One-year adjustable-rate mortgages could be had at 4.17%, up one
basis point. The Mortgage Bankers Association Purchase application was about
unchanged last week. Purchase applications were up 14% from one year ago, with
dollar volume up 34%. Refi applications jumped almost 11% during the week.
The average Purchase mortgage jumped strongly to $233,600, while the average
ARM dropped to $301,400. ARMs last week declined to 34% of total applications.

This week's ABS issuance jumped to about $23 billion (from JPMorgan). Total
year-to-date issuance of $570 billion is 38% ahead of comparable 2003. This
year's home equity ABS issuance of $366 billion is running 84% ahead of last
year's record pace.

The dollar index lost another 0.3% this week to close at 83.32. The yen and
Canadian dollar gained 1%, with the Swiss franc up 0.8% and the Australian
dollar 0.74%. The Taiwan dollar, Brazilian real, Mexican peso, and Argentine
peso all declined less than 0.4% against the greenback.

Commodities Watch:

November 15 - Bloomberg (Loretta Ng): "China's crude oil imports were at 99.59
million metric tons in the first 10 months of the year, state news agency Xinhua
reported, citing Beijing-based Customs General Administration of China. That
exceeded imports of 91.12 million tons for the entire 2003..."

Gold today closed at $447.05, extending its 16-year high. Copper rose another
4% this week. December crude surged $2.51 today to close at $48.89. The Goldman
Sachs Commodities index added 2.8% for the week, increasing year-to-date gains
to 32.3%. The CRB index gained 2% on the week, with y-t-d gains of 13.2%.

China Watch:

November 15 - Bloomberg (Allen T. Cheng): "Foreign investment in China picked
up in October as companies including Wal-Mart Stores Inc. and Matsushita Electric
Industrial Co. expanded to tap surging demand in the world's fastest-growing
major economy. Foreign investment increased 23 percent from a year earlier
to $53.8 billion through October after gaining 21 percent in the first nine
months, the Beijing-based Ministry of Commerce said... That exceeds last year's
tally, which was an all-time high."

November 15 - XFN: "China is facing water shortages of 30-40 billion cubic
meters a year, state media said Saturday, threatening public health and economic
development. Ministry of Construction official Zhang Qingfeng said some 110
cities in China are 'severely short of water', while another 400 are also facing
shortages..."

November 15 - XFN: "China's retail sales rose 14.2% year-on-year to 498.3
billion yuan in October, up from a growth rate of 14% in September and 10.2%
in October last year, the National Bureau of Statistics said..."

November 18 - Bloomberg (Clare Cheung): "Hong Kong's unemployment rate in
October fell to its lowest in almost three years as hotels, restaurants and
stores added workers to cope with surging visitor arrivals from mainland China.
The jobless rate slid to 6.7 percent from 6.8 percent in September..."

Asia Inflation Watch:

November 17 - UPI (Indrajit Basu): "First came the crash. Then came a phase
of painful consolidation that also saw scores going down under. But now, after
a three-year drought following the dot-com bust of 2000 and the global economic
slowdown, India's software and information technology services sector seems
to be booming again. The financial results of top ranking software and IT services
companies that have announced for the quarter ended September 2004 reveals
net profits have climbed to a seven-quarter high that amounts to a 47 percent
growth on a 41 percent growth in revenues."

November 17 - Bloomberg (Kartik Goyal): "Indian exports rose 9.5 percent in
October from a year earlier, the Commerce and Industry Ministry said without
giving any reason for the increase. Exports were $5.95 billion in October...
Imports rose 20 percent to $8.28 billion, boosted by higher oil imports. The
trade deficit widened to $2.33 billion from $1.49 billion in October last year."

November 16 - Bloomberg (Amit Prakashport): "Singapore's retail sales rose
a faster-than-expected 10.6 percent in September from a year earlier as the
economy added more jobs and higher tourist arrivals fueled spending on clothing,
jewelry and cars."

Global Reflation Watch:

November 16 - Kyodo: "The World Bank on Tuesday raised its global economic
growth projection for 2004 by 0.3 percentage point from April to a real 4.0
percent and its outlook for Japan by 1.2 percentage points to 4.3 percent,
the highest expansion since 5.2 percent posted in 1990 in the heyday of the
Japanese bubble economy."

November 15 - Bloomberg (Lindsay Whipp): "The number of corporate bankruptcies
in Japan fell 17.8 percent in October from a year earlier, the 26th consecutive
monthly decline, Tokyo Shoko Research Ltd. said."

November 16 - Bloomberg (Joao Lima): "Spanish house prices rose 17.2 percent
in the third quarter, led by gains in the southeastern region of Murcia, the
Spanish Mortgage Association said. The year-on-year rate compares with 17.4
percent in the second quarter..."

November 15 - Bloomberg (Halia Pavliva): "Russia attracted 39.4 percent more
foreign investment in the first nine months of the year compared with the same
period in 2003 as companies such as Pilkington Plc, the world's top maker of
car windshields, entered the market. A total of $29.1 billion was invested
in Russia from January to September..."

November 16 - Bloomberg (Julie Ziegler): "Developing countries increased
their foreign reserves by 80 percent in the past four years to become major
providers of financing in international capital markets, the World Bank
said. Brazil, China, India, Mexico, Thailand and Turkey account for 45 percent
of the foreign reserves held by developing countries... The accumulation
of foreign reserves, about two-thirds of which are held in U.S. dollars,
is helping finance the record high U.S. budget and current account deficits.
'The central banks of these countries have become one of the most important
sources of financing for the large U.S. current account deficit, absorbing
51 percent of the overall increase in foreign officially held Treasury bills
between March 2000 and January 2003,' the World Bank said."

November 16 - Bloomberg (Thomas Black): "Mexico's economy expanded at its
fastest pace in four years in the third quarter as a surge in bank lending
fueled consumer demand for cars, furniture and clothes. The economy grew 4.4
percent from a year before after expanding 3.9 percent in the second quarter,
the Finance Ministry said. That growth rate [is] the highest since the fourth
quarter of 2000..."

November 17 - Bloomberg (Romina Nicaretta): "Brazilian retail sales rose for
a tenth month in September, the government said. Retail, supermarket and grocery
store sales, as measured by units sold, rose 8.9 percent from the year-earlier
period after rising 7.5 percent in August..."

Dollar Consternation Watch:

November 16 - Bloomberg (Veronica Espinosa and Flavia Krause-Jackson): "European
finance officials said the U.S. may need to back up its appeal for a strong
dollar by joining in coordinated purchases of the U.S. currency should it fall
further against the euro. Reacting to Treasury Secretary John Snow's endorsement
of a 'strong dollar' yesterday, Monetary Commissioner Joaquin Almunia said
the 12-nation euro may continue to rise unless the U.S. government follows
up its rhetoric with action. 'The more the euro rises, the more voices will
start asking for intervention,' Almunia said... 'It has to be a coordinated
effort but it seems that our friends across the Atlantic aren't interested.'"

November 15 - Bloomberg (Francois de Beaupuy): "French Finance Minister Nicolas
Sarkozy comments on the U.S. dollar's decline. He spoke to journalists after
a meeting of finance ministers from the countries using the euro in Brussels.
'We are worried about the dollar drop,' which is 'linked' to the accumulation
of deficits of our U.S. friends.' The 12 nations using the euro have a unanimous
'concern regarding the rapid and destabilizing evolution of foreign-exchange
rates.'"

November 18 - Dow Jones (Andrea Thomas): "Earlier this week, French Finance
Minister Nicolas Sarkozy called on the U.S. to respond to the situation. 'We're
worried about the rapid and destabilizing evolution of the world currency markets,'
Sarkozy said. 'It's clear the greenback has become unhinged compared to the
world's other currencies... Now it's up to the Americans to respond.'"

November 17 - UPI: "A group of top U.S. manufacturers said Wednesday said
the dollar is still not weak enough for many companies. The Coalition for
a Sound Dollar -- a group representing more than 95 industry and agricultural
associations and that's associated with the National Association of Manufacturers
-- said the dollar is 'still too strong.''The orderly downward adjustment
of the dollar in global markets makes sense for U.S. businesses and will
help reduce the huge $600 billion U.S. trade deficit...'

November 17 - UPI: "As the Muslim world yearns for the days of the caliphate,
the Islamic Mint is bringing back a piece of it by issuing the Islamic Gold
Dinar. The gold coins are available in the United Arab Emirates and the Dubai
Islamic Bank. This is the first time in recent history that gold dinars are
circulating through established and officially recognized channels. The Islamic
Gold Dinar was the currency of the Muslim community from its beginnings up
to the abolition of the Ottoman Caliphate in 1924. The coin could well come
into rapid use if for no other reason than zakat, the charity giving which
is one of the five pillars of Islam, cannot be paid using a promissory note
but instead must be paid using gold, silver or certain categories of merchandise.
Malaysia's former Prime Minister Mohammed Mahathir pressed for the establishment
of an Islamic Trading Bloc with the Gold Dinar as the bloc's common currency.
The coin is 4.25 grams of 22 carat gold, following the standard laid down by
Caliph Umar Ibn al-Khattab, the prophet Muhammad's second successor."

California Bubble Watch:

November 18 - Bloomberg (Danny King): "About a quarter of California residents
are considering moving, either to another part of the state or to another state,
because of high housing prices, according to a Public Policy Institute of California
poll. More than half of the respondents said the availability of affordable
housing was a big problem in their region while 77 percent said they are at
least 'somewhat' concerned that housing prices will prevent their children
from buying a home in their area, the poll said. In September, the most recent
month available, the median-priced single-family home rose 21 percent to $465,540
from $384,690 a year earlier... It said about 19 percent of households could
afford a median-priced home...down from 24 percent a year earlier."

November 17 - Los Angeles Times (Annette Haddad): "When it comes to Southern
California real estate, there's the big picture and then there's the neighborhood-by-neighborhood
view. From a macro standpoint, the region's housing prices continue to appreciate
at a double-digit pace from last year. In October, Southern California's median
home price surged 23.1% year over year to a record $410,000... It was the third
consecutive month, and 10th out of the last 12 months, that the median price...hit
an all-time high. Yet, the data also showed that prices were leveling off in
the more urban parts of the five-county region. For instance, Orange County's
median has edged 2% lower since May; Los Angeles County's, 1.2% since June;
Ventura County's, 4% since September. 'It's starting to look like prices in
many of the more expensive neighborhoods have leveled off or have come down
slightly from a summer peak,' said Marshall Prentice, DataQuick's president.
Meanwhile, homes in mid-market and entry-level communities continue to see
advances in prices."

November 1- Associated Press (Alex Veiga): "Home sales in California were
down overall last month, but prices continued to rise, particularly in the
more affordable inland areas... The median price of a home in October was $395,000,
a 21.5 percent increase from $325,000 the same month a year ago and up 1.8
percent from $388,000 in September, according to DataQuick... For the month,
a total of 54,300 new and resale houses and condos were sold statewide, a 6.2
percent decline from 57,900 in September and down 5.9 percent from 57,700 in
October 2003..."

November 19 Bloomberg (Kim Chipman): "University of California regents yesterday
voted to boost costs for the fourth straight school year, increasing undergraduate
fees by 8 percent and graduate fees by 10 percent for 2005-06... The increase
means total fees for California resident undergraduates in
the university system will have risen almost 80 percent from 2001-02 to the
coming school year..."

Bubble Economy Watch:

November 16 - MarketNews (Kevin Kastner): "In the face of increased competition
from commercial banks as well as other sources of credit, banks operating in
the United States appear to have eased their standards and terms on business
loans at a time when demand has started to rise, the Federal Reserve's Senior
Loan Officers Survey for October showed. The survey...which covers the three-month
period from August through October, showed that banks view this increased competition
as permanent change in the structure of commercial business lending, rather
than a temporary change. The competition came from other commercial banks,
as well as investment banks, insurance companies and hedge funds, and was significant
enough for banks to ease their lending standards and terms at a time when banks
were seeing increasing demand for commercial loans, including real estate."

November 15 - Bloomberg (Kristy McKeaney): "U.S. spending on Visa brand cards
rose last week compared with the same week last year. In the week ending Nov.
14 purchases with Visa debit and credit cards rose 17.5 percent to $22.586
billion compared with the same week last year."

November 15 - Dow Jones (Kathy Chu): "The ranks of U.S millionaires surged
33% to a record 8.2 million households in mid-2004, buoyed by this group's
steady investment in the market. An additional 2 million households this year
joined those with more than $1 million in net worth excluding primary residence,
according to TNS Financial Services' annual survey of the wealthy."

November 15 - UPI: "The Pension Benefit Guaranty Corp.'s insurance program
faces a deficit of $12.1 billion for fiscal year 2004, the U.S. government
agency said Monday. The program has $39 billion in assets and more than
$62 billion in liabilities, Executive Director Bradley Belt said in a statement.
The agency's fiscal year-end deficit increased to $23.3 billion from $11.2
billion a year earlier. For the first time, the total number of people owed
benefits by the PBGC passed 1 million, and the total amount of benefits paid
passed $3 billion."

Fannie posted back-to-back strong months. The company's Book of Business expanded
at a 9.1% rate during October to $2.30 Trillion. Fannie's Retained Portfolio
grew at an 11.5% rate to $913 billion.

October Homes Under Construction were up 10.9% from one year ago to a new
all-time record. Homes Under Construction were up 47.4% from October 1997.
At 2.027 million annualized, New Home Starts were the strongest in 10 month.

November 18 - American Banker (Rob Blackwell): "The Federal Home Loan Bank
of Seattle said Wednesday that its third-quarter earnings plummeted 53% from
a year earlier. It blamed low interest rates and the poor performance of its
Mortgage Purchase Program and advance business. It was the third batch of bad
news this week for the housing government-sponsored enterprises. The Home Loan
Bank of Chicago has announced that it is reviewing its past financial statements
because of an accounting change and Fannie Mae has said it could take $9 billion
of losses if it is forced to restate earnings."

Greenspan Watch:

Alan Greenspan was today on a panel at the European Banking Congress 2004,
along with Kazumasa Iwata, Deputy Governor of the Bank of Japan, and Jean-Claude
Trichet, President of the European Central Bank. Mr. Greenspan's remark that "given
the size of the U.S. current account deficit, a diminished appetite for adding
to dollar balances must occur at some point," garnered considerable media attention.
I found the Q&A more intriguing.

Question: "You used the words "irrational exuberance" in your [December 1996]
talk about the valuation of the stock markets. Since then we have seen a substantial
correction. The new buzzwords are "hedge funds" or "the credit derivatives
market." Is that something which you look at with concern, and do you take
that into account in your monetary policy?"

Chairman Greenspan: "Strangely Mr. Chairman, I look at them with some significant
positive attitudes for one very important reason. As the conversation
evolved today, I think it becomes clear that as a consequence of the ever
rapid movement of globalization that the adjustment processes- which invariably
occurs as a consequence - run through the market system and not the result
of governmental policies. Indeed, the vast amount of problems that emerge
in the global system are never actually visible because market price adjustments
and exchange rates and interest rates absorb the adjustment before it becomes
visible. And so this is a system which I've often termed is the "international
invisible hand." The onset of newer products such as Credit derivative
swaps and institutions such as the newly-structured hedge funds actually
are very major players in this issue of flexibility. As I have often
observed, we went through the latter part of the 1990s - and indeed the 1998
crisis - with remarkable degrees of flexibility. And there was, for example,
very large issuance of telecommunications debt - from I think, 1998 through
2001 - in the U.S. dollar equivalent of about a Trillion dollars worldwide.
A significant part of that debt defaulted, yet largely as a consequence of
Credit default swaps, collateral debt obligations, and other means by which
risk was being transferred, no large financial institution in the world went
into default or even into significant difficulty. The spreading of the risk
was very critical - and indeed my suspicion is that without these risk-spreading
instruments we would have been in far greater difficulty as a consequence
of the problems which emerged, especially subsequent to the decline in 2000
and 2001 in most world financial markets. Hedge funds are evolving from
what they used to be, and their main evidence within financial markets is
as arbitrageurs. They seek abnormal profits by trying to find niche abnormalities
in the marketplace, which means prices are out of balance and therefore create
the possibility of above average rates of return. But the actual exploitation
of that imbalance eliminates it. And, indeed, one can see the huge amounts
of funds that hedge funds have moved in and out of various markets - in and
out of various instruments - which has kept the system fluid and flexible.
And I would be most concerned if we were to lose the flexibility added by
either of these major instruments - like Credit default swaps - or new institutions
such as hedge funds."

My comments: It is again clear the Mr. Greenspan fails to recognize the epic
changes that have transformed global Credit system dynamics. Financial "evolution" has
profoundly altered "risk intermediation" - increasing global Credit Availability
from subprime to emerging markets. Contemporary financial engineering has dramatically
affected "the moneyness of Credit." At the same time, the capacity for a diverse
group of participants to leverage myriad debt instruments has created global
markets liquefied like never before. Credit and liquidity excesses have so
distorted the pricing mechanism to the point that the notion of an 'invisible
hand" guiding market adjustments and self-corrections is pure fantasy.

And I do agree that "hedge funds are evolving from what they used to be." However,
it is much more a case that the funds used to be "arbitrageurs" seeking to
profit from market inefficiencies and pricing anomalies. Today, such opportunities
would be trivial and not come anywhere close to providing even minimal returns
for the nearly $1 Trillion invested in hedge funds (and unknown sums in "proprietary
trading'). Instead, the speculation game evolved to playing for profits from
discrepancies created by government policies - largely ultra-easy and carefully
telegraphed monetary policies.

And while it may be tempting to trumpet the wonders of contemporary "market
systems" and "the international invisible hand," there is a dangerous illusion
at play. In reality, the market pricing mechanism has been completely maligned
by the Fed and global central banks pegging short-term interest rates, while
at the same time guaranteeing abundant liquidity. It is only this mirage of
omnipresent liquidity that has nurtured both endemic over-leveraging and the
proliferation of derivative hedging and speculating. And only with unrelenting
leveraging and speculation does the massive intermediation - led by the GSEs
and Wall Street structured finance - continue to transform risky loans (largely
financing asset Bubbles) into perceived safe and liquid marketable securities.

And I have a big problem with the view that "flexibility" should be largely
credited for the global system persevering through the telecom debt collapse.
Rather, it was a case of the Fed and global central banks orchestrating an
historic collapse in market rates and inciting unprecedented mortgage (and,
in the case of the U.S., government) and securities borrowings. The telecom
losses were monetized (system losses more than replaced by large quantities
of newly created debt instruments, along with rising prices for all debt securities),
just as the S&L and bank losses were monetized in the early nineties.

Yes, the hedge funds and Wall Street structured finance played an instrumental
role in the Credit excesses/monetization. But we are today left with a system
commandeered by leveraged speculators and asset Bubbles, and absolutely no
viable option for disengaging Bubble dynamics. The danger of using leveraged
speculators as part of the monetary policy transmission mechanism is that it
works all too effectively in a declining rate and Credit Bubble environment.
There is already a strong inflationary bias in the debt markets, while the
size and scope of the speculating community is growing rapidly. Most importantly,
however, monetizing previous Credit losses will become a much more arduous
task on the downside of the Credit Bubble.

Question: "How long will the transpacific recycling machine for dollars run?"

Chairman Greenspan: "Well, obviously we have looked at the issue of the impact
of monetary authority intervention in the dollar for purposes of sustaining
exchange rates quite closely. Our interest is obviously focused on the impact
on the exchange rate and on interest rates. Our general conclusion is
that the impact has so far been moderate, not exceptionally large but clearly
visible. One of the reasons it's not very large is the fact that U.S. Treasury
and agency securities compete with a very large block of dollar-denominated
private issues. And, as a consequence, these are very large markets and it
is very difficult to dent specific interest-rate differences, especially when
a significant amount of this intervention is in very short-lived bills and
other instruments which obviously don't fluctuate terribly much in price and
hence, create problems with respect to capital gains and losses. We do know
that very large interventions, and I'll allow my Japanese colleague to pursue
this issue later, do not create very large increases in exchange rates of a
protracted nature. But clearly the impact is there. Remember that - in
fact let me just raise it in this context - when you (the Bank of Japan) ceased
intervention in March there was not terribly - from going from a very large
amount of intervention - even including the time difference between intervening
in dollar-denominated deposits and converting them to U.S. Treasury issues.
You don't see a very clear picture of the impact on adjustment on the exchange
rate. So it's quite an important notion because what it is suggesting is that the
degree of sophistication in the international financial markets has reached
the point where you can see fund flows of the order of magnitude that we're
seeing with remarkably little change in either interest rates or exchange rates
as a consequence of those particular flows."

My comments: The latest tally has Asian central bank (largely dollar) international
reserves up $503 billion, or 32%, over the past 12 months to $2.09 Trillion.
Econometric models will in no way capture the myriad effects this massive government
intervention has had on market dynamics. Without this intervention, we would
be today much further along in the unfolding dollar crisis. Instead, over-liquefied
global markets have so mis-priced Credit, fostering precarious asset-Bubble
dynamics and the mis-allocation of finance and real resources.

Question: "The monetary relations between the U.S. and Asia have been compared
to the Bretton Woods system with some obvious implications. Would you accept
that comparison?"

Chairman Greenspan: "Remember that Bretton Woods was a full lock, and there
is a very significant difference to a partial lock and a full lock because
you have a very substantial part of the currency markets to absorb any currency
shocks. And as a consequence, while I would much prefer that those locks were
not there, I cannot say that I would perceive it as a very significant undermining
of flexibility or the adjustment process, which the global financial system
has exhibited."

My response: I believe the global currency system is operating similar to
the period preceding the breakdown of Bretton Woods. Dangerous imbalances were
running out of control, while U.S. policymakers refused to take responsibility.

Question: "We had a discussion a year or two ago about the deflationary threat.
Can we assume that the deflation theme will be solved for the years to come?"

Chairman Greenspan: "I was quite confident I could answer the question until
you put the last several words on the question. Obviously we can't project
for the years to come - it is sort of an open-ended issue. But what the period
preceding 2003 and up to the summer of 2003 demonstrated, was that - in strong
opposition to almost all economists' views in the post World War II period
- that the old fashioned corrosive deflations of the pre-World War II period
were not possible with a fiat currency. As a consequence, we never gave it
a second thought because the first thought was largely that it just could not
credibly happen, since central banks could always print money. The Japanese
experience shook us, as I am sure it shook you (BOJ's Mr. Iwata) as well. And
it got us to begin thinking about whether the nature of modern finance has
become such that, even with a fiat currency, you could still create a system
in which you got deflationary forces. Even though we always perceived - during
in the Spring and Summer of 2003 in the United States that deflation was a
very low probability, nonetheless our evaluation of the consequences of it
occurring were it to occur were extraordinarily destabilizing. And as a consequence,
we took actions to counter what is a very low probability event. And were that
to happen, we would of course, do it again. However, it is clear that for the
period since the summer of 2003 and, one would presumably argue for the period
ahead - for several years - I think we can say we've obviously reduced the
probability of deflation to such a low level that no counter-action for the
immediate future seems conceivable - at least to me."

My comment: The issue has not been deflation per se but debt collapse. And
after two years of astonishing global excess, the risk of a systemic liquidity
crisis and bursting asset Bubbles is clearly much greater today than it was
in 2002. Unfettered contemporary Credit systems - evolving to focus on asset-based
lending - have developed a strong proclivity for fostering boom and bust dynamics.
The reflationary policies of the past two years have increased the probability
that U.S. debt and asset busts will run concurrently with a sinking dollar
and attendant inflationary pressures.

Question: "Is the world, particularly emerging market economies, prepared
for a period of increasing interest rates or are new crises around the corner?"

Chairman Greenspan: "Rising interest rates have been advertised for so long
and in so many places that anyone who has not appropriately hedged this
position by now obviously is desirous of losing money."

My comments: I recall Mr. Greenspan placing partial blame for the SE Asian
financial collapse on "unhedged" foreign debt holdings. It often seems the
case the he refuses to grasp the very essence of derivative markets and hedging.
Market participants can and do shift risk exposures among themselves, and this
mechanism works very efficiently and effectively in normal market environments.
There is, however, a very important exception: It is simply impossible for
a major "market" to hedge itself against a significant decline in prices. Quite
simply, there is no one or group with the wherewithal to accommodate the offloading
of market risk, leaving the task instead to thinly capitalized players (speculators)
and their dynamic trading strategies.

Why didn't everyone that was invested in NASDAQ in early-2000 buy puts and
lock in bull market gains? Indeed, I would argue that derivatives become especially
dangerous when they are used by a large segment of the marketplace, while "insuring" against
the same directional move. As was the case with NASDAQ, much of the final destabilizing "blow-off" melt-up
was from panic buying related to the unwind of hedges and bearish speculations.
The sellers of derivative protection (that would have then established short
positions in the market to partially hedge their exposure) were forced to cover
shorts into the final spike, only then abruptly forced to panic sell to re-hedge
when the market reversed and began to collapse. I believe one of the untold
market stories of 2004 has been the repeatedly unsuccessful attempts by market
participants to hedge against rising rates. An over-liquefied market environment
coupled with the proliferation of hedging programs incited repeated rallies
(mini dislocations) that forced the unwinding of hedges. The upshot is today's
artificially low market yields and a marketplace at considerably greater risk
than would have been the case otherwise. Derivatives have been counterproductive
and destabilizing - in various markets.

The currency markets could not be more fascinating these days. There is, understandably,
much talk about the euro and other currencies being "over-bought." Sentiment
indicators have dollar bearishness at very high levels, and there is a lot
of bearish dollar talk these days in the media. Yet I hear very little concern
for a dollar crisis or potential collapse. Well, I certainly see dynamics in
play that risk a very serious dislocation in the currency markets - not unlike
the breakdown of Bretton Woods.

The dollar has been declining now for over two years, yet the inevitable adjustment
period has not even begun. Importantly, the Fed's misguided war against deflation
has tremendously distorted our financial and economic systems. And it is now
impossible for us or the rest of the world to "grow our way out" of the problem.
If foreign central banks further push the accelerator to stimulate U.S. exports,
get ready for $75 crude, $600 gold, and only more problematic global Monetary
Disorder. Here at home, our central bank has nurtured a dysfunctional U.S.
financial Credit system that is today only capable of sustaining mortgage lending
excess. The nature of inflationary manifestations ensures over-consumption,
minimal economic investment, massive trade deficits and global liquidity excess.
These liquidity excesses and the attendant weak dollar have fueled a major
inflation in non-dollar asset-classes, which has incited increasingly self-reinforcing
speculative flows out of the dollar. As with all great inflations, the consequences
become increasingly uncontrollable, while there is always a need for additional
inflation to keep the game going.

The Fed is in a quagmire. It will not risk piercing the Credit or Mortgage
Finance Bubbles, so the spigot of Credit and liquidity excess runs wide open.
Asian central bankers are left to purchase massive dollar securities, in what
should be an increasingly conspicuous self-defeating proposition. This only
supports over-heated U.S. debt markets - and unrelenting Credit, speculation
and liquidity excesses. The Fed is now facing its comeuppance. Greenspan should
never have nurtured the Bubbles of leveraged speculation and asset-based lending.
And only time will tell as to what accident is waiting to erupt in the currency
derivatives markets. Simultaneously rising rates and a sinking dollar could
spell trouble for our foreign creditors and derivative player. There have been
similar Credit system Bubbles and dysfunctional dynamics in play over the past
decade, and they have invariably ended in crisis.